Stablecoins, Regulatory Capture, and the Quiet Engineering of Monetary Fragility

 

Stablecoins, Regulatory Capture, and the Quiet Engineering of Monetary Fragility

On July 18, after more than a decade of regulatory ambiguity surrounding stablecoins, the United States enacted the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act. Publicly, the legislation was presented as a long-overdue effort to bring a portion of the crypto industry into a regulated framework, protect consumers, and reinforce the global role of the U.S. dollar. Structurally, however, the law does something far more consequential: it embeds privately issued digital liabilities directly into the core plumbing of the U.S. financial system while shifting risk outward and concentrating control inward.

The GENIUS Act requires stablecoin issuers to back their tokens one-for-one with cash or short-term U.S. Treasury securities, submit to audits, and comply with anti-money-laundering rules. On its face, this appears prudent. In practice, it creates a new class of private monetary intermediaries whose liabilities circulate as “digital cash” while their reserves are deeply entangled with Treasury markets. The law explicitly bars stablecoin issuers from paying interest, reflecting a legislative intent to treat stablecoins as payment instruments rather than investment products. Yet at the same time, the law leaves a critical gap: crypto exchanges are not prohibited from offering rewards or incentives to customers who hold stablecoins on their platforms.

This distinction is not cosmetic; it is foundational. By allowing exchanges to provide yield-like rewards, the system recreates interest-bearing behavior while formally denying that interest exists. Coinbase currently offers customers approximately 4.1 percent annual rewards for holding USDC, comparable to a high-yield savings account. Kraken advertises returns as high as 5.5 percent. From the consumer’s perspective, these instruments function indistinguishably from interest-bearing deposits. From a regulatory perspective, they are treated as something else entirely.

Banking industry groups have correctly identified this as a loophole. If consumers can earn returns comparable to or higher than insured bank deposits, while holding instruments that are not subject to bank capital requirements, liquidity rules, or FDIC insurance, a structural incentive emerges to migrate funds out of the banking system. The Federal Reserve Bank of Kansas City has warned that if stablecoins are funded through withdrawals from bank deposits, banks will have fewer funds to lend, potentially increasing borrowing costs across the economy. The Treasury Department has gone further, estimating that as much as $6.6 trillion could move from bank deposits into stablecoins under plausible scenarios.

What these analyses often miss, however, is the deeper monetary consequence. Stablecoins do not merely reallocate existing money; they amplify it. Because stablecoins are denominated, traded, and settled in U.S. dollars, their growth functions as a form of on-demand balance-sheet expansion. When demand for stablecoins rises, new dollar-denominated liabilities are created instantly, while reserves are parked in Treasuries. The result is not neutral intermediation but a feedback loop between private token issuance and public debt markets.

This creates a paradox. Stablecoins are marketed as safer because they are backed by Treasuries, yet Treasury markets themselves become more fragile as they absorb concentrated, redemption-sensitive demand from stablecoin issuers. In a stress scenario, redemptions force Treasury liquidations, which depress prices, which further undermine confidence in stablecoins. This is a procyclical structure masquerading as stability.

The Bank for International Settlements has already noted that even the least volatile stablecoins “rarely trade exactly at par,” calling into question their reliability as a means of payment. More importantly, because stablecoins such as Tether and USD-pegged instruments derive their value entirely from the dollar, they cannot serve as a hedge against dollar instability. If confidence in U.S. fiscal or monetary credibility erodes, stablecoins do not provide refuge; they collapse alongside the dollar. Every crypto asset priced in dollars is, in this sense, a derivative of dollar stability. Destroy the denominator, and the numerator becomes meaningless.

Despite this, stablecoins are already being used in cross-border settlement contexts, including sovereign and quasi-sovereign trade arrangements. This accelerates the migration of payment flows away from regulated banking rails and into private platforms whose governance structures, audit practices, and legal accountability remain opaque. While the GENIUS Act mandates audits, few detailed, independently verified public audits have been made available to demonstrate reserve composition, liquidity stress tolerance, or governance controls at the scale implied by current usage.

The problem is compounded by concentration. A small number of financial intermediaries manage enormous pools of Treasury securities on behalf of stablecoin issuers. When financial power, policy influence, and asset custody intersect, even the appearance of conflicts of interest becomes destabilizing. This is not a claim of illegality; it is a recognition that modern financial crises are rarely caused by explicit fraud. They are caused by structural incentives that reward risk-taking while diffusing accountability.

Advocates argue that stablecoin rewards simply introduce healthy competition, forcing banks to raise rates and modernize. Yet this argument ignores a fundamental distinction: banks create credit through regulated lending, subject to capital buffers and supervision. Stablecoin ecosystems create dollar-denominated claims without comparable loss-absorption mechanisms. If a bank fails, insured depositors are protected and resolution frameworks exist. If a stablecoin ecosystem fails, the legal and political pressure to intervene will fall on public institutions that explicitly disclaimed responsibility.

The legislative history reinforces this concern. The prohibition on interest was intended to preserve the distinction between digital cash and investment products, yet the compromise that allowed exchange-level rewards undermines that premise. Stablecoins are declared not to be securities, yet they increasingly behave like yield-bearing instruments. This blurs regulatory boundaries while evading the disclosure and consumer-protection requirements that securities law exists to enforce.

As Congress now considers the CLARITY Act, which aims to establish broader crypto market structure rules, the same interests that shaped the GENIUS Act are returning to relitigate unresolved provisions. Banks, crypto firms, and financial intermediaries are all maneuvering to secure advantage in what is effectively a multitrillion-dollar contest over deposits, payment flows, and interest margins. Meanwhile, major banks are preparing to issue their own stablecoins or tokenized deposits, further entrenching private digital liabilities as substitutes for public money.

The cumulative effect of these developments is not innovation but quiet fragilization. Crisis language is deployed without declared emergencies. Public credit supports private balance sheets without explicit appropriation. Control over monetary instruments migrates away from democratically accountable institutions. When failure eventually occurs, blame will be diffuse, while costs will be public.

This is why oversight is not optional. Congress must examine reserve custody, governance authority, redemption mechanics, conflict-of-interest exposure, and systemic stress scenarios before scale makes correction impossible. Transparency now is cheaper than intervention later. The United States has learned repeatedly that when private financial structures become “too embedded to unwind,” the public inherits both the losses and the political fallout.

Stablecoins do not threaten the system because they are new. They threaten it because they are being treated as neutral plumbing when they are, in fact, private money. History is unforgiving to societies that confuse the two.

Dear Senators,

I am writing to request a formal congressional review and audit concerning the creation, capitalization, and systemic financial risk posed by the entities known as World Liberty Financial (WLF) and the dollar-pegged crypto asset USD1, including the roles of their founders, partners, and affiliated financial institutions.

This request is not political. It is structural, financial, and national-security related.

At issue is whether a privately controlled, dollar-pegged crypto structure—promoted by politically exposed persons and allegedly capitalized with foreign funds—creates a mechanism that could accelerate instability in U.S. capital markets, the U.S. dollar, and public trust in American financial governance.

1. Core Structural Concern

USD1 is reportedly marketed as a U.S. dollar–pegged digital asset that also holds exposure to U.S. securities and crypto assets. By design, this structure creates a critical dependency:

• USD1’s stability depends on the continued solvency and credibility of the U.S. dollar.
• Its reserve assets are reportedly tied to U.S. Treasuries and dollar-denominated instruments.
• It is traded within crypto markets that themselves are largely priced in U.S. dollars.

This creates a circular risk loop:
If confidence in the dollar weakens, USD1 cannot meaningfully hedge or redeem, because its assets and pricing mechanism depend on the same currency it claims to mirror.

In a stress scenario, this is not diversification—it is concentration.

2. Alleged Foreign Capital Involvement and Market Losses

Public reporting and blockchain analysis circulating in the crypto community suggest that a foreign investor—widely described as a UAE royal figure—may have provided up to $500 million in funding associated with the USD1/WLF ecosystem.

Additionally, it is alleged that approximately $94 million was deployed into Bitcoin and Ethereum around January 20, 2025, when prices were approximately:

• Bitcoin: ~$102,000
• Ethereum: ~$3,365

At current market levels (Bitcoin ~$69,000; Ethereum ~$2,000), this would represent a drawdown of roughly 35–40%, reducing $94 million to approximately $59 million.

These losses raise several questions appropriate for oversight:

• Who authorized these allocations?
• Were they disclosed to investors or counterparties?
• Were political relationships used to signal implied downside protection?
• Were U.S. persons exposed, directly or indirectly?

Losses alone are not crimes—but opacity combined with political proximity is a red flag.

3. Political Exposure and Conflicts of Interest

What elevates this matter beyond ordinary crypto risk is the reported involvement of politically exposed persons, including:

• Donald J. Trump
• Donald Trump Jr.
• Eric Trump
• Barron Trump
• Steve Witkoff and his two children and related partners

If accurate, this creates an unprecedented scenario in which:

• The U.S. president is associated with a private dollar-linked financial instrument
• Foreign capital may be intertwined with that structure
• Any collapse or failure would almost certainly be politically blamed, regardless of who engineered it

This is a classic moral hazard and blame-transfer structure:
If the system fails, the damage accrues to U.S. institutions and the dollar, while private actors externalize risk.

4. Systemic Risk to the Dollar and Crypto Markets

A critical but under-discussed issue is this:

If the U.S. dollar were to experience a sovereign debt crisis, liquidity freeze, or credibility shock, then:

• Dollar-pegged stablecoins backed by U.S. securities would face simultaneous asset and redemption failure
• Crypto markets priced in dollars would suffer pricing collapse
• Stablecoins marketed as “safe” could rapidly go to zero in real terms

In such a scenario, USD1 would not be a stabilizer—it would be an accelerant.

This is not theoretical. It is a basic consequence of pegging a private instrument to a sovereign currency while also relying on that same sovereign’s debt instruments for backing.

5. Requested Congressional Action

Given the above, I respectfully request that Congress consider:

1. A formal audit of:
2. • Cantor Fitzgerald and related custodial or advisory roles as they own $80 billion in US treasuries, while its main owner is Howard Lutnick secretary of Commerce, (talk about conflict of interest and personal enrichment)
   • World Liberty Financial (WLF) (Owned by Trump, his children and Steve Witkoff and his children)
   • USD1 reserve structures and counterparties
2. Full disclosure of:
3. • All founders, partners, beneficial owners, and foreign investors
   • Capital flows, asset allocations, and reserve compositions
   • Any political or diplomatic communications related to funding
3. Independent technical review by experts in:
4. • Crypto market structure
   • Stablecoin failure modes
   • Sovereign debt and currency risk
   • National security finance
4. Clear separation standards between public office and private dollar-linked financial instruments.

6. Why This Matters Now

If these structures collapse later, the narrative will not be technical—it will be political.
The public will not distinguish between private engineering and public responsibility.

The question is not whether crypto should exist.
The question is whether the U.S. dollar itself is being used as collateral in a privately engineered risk structure without adequate oversight.

That is squarely within Congress’s constitutional responsibility.

Thank you for your attention to this matter and for your continued service to the integrity of U.S. financial governance.

Respectfully,
Concerned Citizen and Financial Systems Analyst